Nokian Renkaat Oyj

Ari Lehtoranta - President and CEO Anne Leskelä - VP, Finance and Control & IR

Nikhil Bhat - JPMorgan Henning Cosman - HSBC Mattias Holmberg - DNB Andrea Turon - Aaron Martin Viecha - Redburn Gaetan Toulemonde - Deutsche Bank Edoardo Spina - Exane BNP Paribas Kye Miller - Bank of America/Merrill Lynch

Hello. Rauli Juva from Nordea.

One question on the North American winter tire market. You commented earlier on the year that you expect around flat.

Now your sales at least for the nine months are still clearly down. So are you still expecting kind of flattish development there for the full year?

Yes, we have said that the biggest negative driver for North American market will be this very, very negative situation with the winter tire inventories, customer inventories at the starting of the year. I don't remember that we have been even forecasting flat for the North America.

Now of course for the winter tires the delivery situation for the inventories have been cleared out already. So now the inventories levels are not anymore in a bad shape.

So if the winter comes in North America, then we will be benefiting because the winter tire inventories not only, if you have some over stock from the last season, not only you don't order new ones to fill it up to the same level, but you take typically a little bit more conservative view for the inventories when you have a bad season behind. And this has happened in North America as well.

So the customers' inventories are actually even in lower levels going to the season as they were last year just before the season. So therefore for the fourth quarter as such we are expecting not any more decline.

All right, thank you. And on the Russian side you're increasing your full year forecast.

Was this more related to the development you have seen over the nine months in the summer tire season you mentioned or has your kind of outlook or situation into winter tires season also improved?

A main driver for this outlook of course is the summer tires. We got during the third quarter we got the final results of the summer season.

Summer season is not only the spring change season, but of course we need to look at the whole season and then we'll get the statistics slightly with a slight delay. And that was surprisingly strong, one of the best summers in four to five years.

Okay, thank you.

And what does it mean that it's good summer? It actually means a lot of positive things.

So first of all, you get the good sales, especially if your market share is increasing or your customers' market share is increasing. But it's good to remember that we start selling summer tires already in the fourth quarter.

So now customers have an extremely successful summer season behind. The summer tire inventories are lowest for five years or so.

That also means that there's space for the winter tires. So that doesn't prevent them of taking some refills now for the season if they need.

And then the fourth item is that financially, profitability wise, they did an extremely good summer, which means that, for example, we don't have any new bad debt cases. The customers' financial situation in general has been now improving in Russia.

For the outlook, we still have in our own forecast, we have some bad debt cases, not any more new cases from the Russia, but some of the tails from the already known cases, where we have already made some provisions earlier. Anymore questions from this room?

If not, operator, we are ready to start taking questions from the virtual audience.

I have two; firstly on Russia. And it seems to us that you are getting intermittently more positive.

I was wondering if you could give us any initial color on how you're seeing the market in the next year, 2017. That is my first question.

And then second question is on the material guidance in the EBIT bridge. You've done 38 million for the first nine months and how does that compare to the 70 million raw material guidance that you have for the full year?

What should be the comparable number we should think about in the EBIT bridge for the full year? Thank you.

Okay, so first your question was about the outlook for Russia for next year. And the only thing that I can say is that of course customers' financial situation has improved.

The summer inventory levels are at very low levels at the moment. Winter season has started very, very well.

40% to 50% of the season is already behind and that is going well. So at least what we can say is that there will be no negative winter tire inventory situation going into 2017 like we had at the beginning of this year.

We don't know yet whether it will be okay or even very good inventory level, but that's still a variable part. So looking good.

Then of course new car sales, we are now estimating that the last three months should start to be in a single-digit negative growth. And then the comparable quarters from this year going to the next year, they are quite low in that respect.

Oil prices have stayed now in a clearly better level. Ruble has stayed actually surprisingly stable now for the last few months.

Confidence indexes are going up. So we are expecting a slight growth in Russia.

But however let's remember again that there are no miracles at least that we could foresee that would enable a fast growth in Russia. Your second question about, is this old question about our raw material, how we forecast about it.

How we make the €70 million calculation is that we look at the corresponding volumes, so that if we would be making same volumes between these two years and then look at the raw material cost development, then the positive impact is €70 million. Naturally, now that we are making more than last year, then the actual impact is higher, like you said in your question.

So you need to take into account in this comparison the volume differences between the years. So far we have been producing 5% more than last year, and therefore, the positive impact is clearly more than this €70 million.

I'll get back with a few more questions. Thank you.

One question on this set of results, if you could just illustrate now a comment on the elimination's line quickly. I think that's quite a bit bigger than usual, if you could help us understand that.

And then secondly on the third plant. I think you lately indicated that you would still be making the decision in the fourth quarter, so now basically.

If you could update us on that as well as on your own succession, if there's any progress in finding a successor for yourself. And then thirdly, I don't want to ask about 2017 guidance now, but maybe you could put into perspective with the mid-term outlook that you gave at the Capital Market Day when you said 16 to 18 average, 4% to 5% growth and minimum 22% profit margin.

And also if that would still be the case or what your confidence level is if you would put the third plant in place leading to a profitability dilution in the ramp up phase, if you would still be 100% confident that the operating profit level wouldn't drop to under or below the 22%? Thank you.

Okay. A few short-term questions and some a little bit longer term questions.

But if I start from this eliminations, you're right that the elimination figure line is clearly more negative than normally for the quarter. We have some internal inventory adjustments or eliminations, how we do them.

For example, how and when do we fill in the Vianor inventories that impacts the differences between the quarters. And we had a little bit of specific differences between the second quarter, where the eliminations was very low, and then our third quarter.

So you need to look at the year-to-date figure, which is at the same level as last year. And then I'm expecting also the fourth quarter to be at the same level as last year.

So overall there should not be any kind of similar type of negative impact in the fourth quarter. We are very, very sure about it.

Third factory, yes, we are progressing. What we are doing is that we are, in this quarter we are making a proposal for the Board.

Whether the Board will be able to make immediate decision, whether they want to, for example, leave the final decision to be also reviewed by my successor or whether they really will be making the decision immediately, that I cannot guarantee. But we will be ready to present this to our next Board, which happens to be later this year in December.

Then the question about my successor, the Board is working on it and nothing to report about it. They will report when they are able to progress.

And then the question was about the longer term outlook, I think that the positive thing is that even though we have not able to hit the sales growth this year because of the winter tire inventory issues, elsewhere we are progressing as planned. Maybe the small difference only is in the heavy tire side.

We've been able to maintain very nice and high profitability levels, despite the fact that we've been making those investments for the future. So I'm very positive about, also about the future, both the growth and then the profitability what we have been promising.

And that would also be true if there was a dilution effect from this new third plant?

Third plant factory investments, they will be, first of all, they will be spread into the several years. So we are not going to build it up in one year.

So the kind of, also the depreciations and ramp-up costs, they will be split to several years. Our cash flow is in a good situation.

Our demand from the customers is increasing. And when we look at the new products that we have just launched to the portfolio and what we have in our plans and roadmaps going forward, we will be able to also sell the increased capacity.

Before the third factory, we are naturally making slightly less CapEx intensive capacity increases; meaning that we are going to implement the capacity increases in Russia, like we have said earlier.

Thanks, Ari, and all the best for you.

Thank you.

So you have a really nice EBIT margin for the passenger car tires division this quarter, up quite significantly year-over-year. And I was just wondering if this is in any way affected by the larger eliminations compared to last year and also I was wondering if you can give us some flavor on if we could expect this margin to stabilize going forward or is this sort of a one-off quarter.

Thank you.

First question was that whether eliminations had anything to do with this very high, or very nice 36% EBIT margin for the passenger car tire unit. And the answer is, no, nothing at all.

This is on the corporate level that we do these eliminations. The second question was if I understood correctly was that is this an indication of the ongoing margins.

And there so many things can happen. Of course it says something about the healthiness of the business, the portfolio, the quality of our operations.

Good to remember, however, that there were very little, almost no extraordinary items during this quarter and even in the normal quarter we have had about 8 million to 10 million bad debt provisions, so in average 2 million, 2.5 million for the quarter. But I am not expecting either this kind of good profitability levels continue in the coming quarters.

Great. Thank you.

That's all from my side.

Yeah, I may be add to this that you remember, I've been telling already now for two years that we are in a transition phase what comes to the quality of our customer base, meaning the dealers that we are making sure that we are selecting the best dealers. We are enabling them to make best margins with our tires.

And this strategy is working very well. So not only it helps them to earn better, but also typically our margins stay in a more sustainable level.

Great. Can I just have a short follow up?

So considering you're finding good expansion in Central Europe and North America, where all season tires are a bit more widely spread. Do you see this hampering the margin expansion or sort of hampering the Group margin at all from lower selling prices?

There are so many things that impacts the profitability. For example, if there are any drastic changes regarding the raw material prices to any directions, it typically has at least short term impacts, either positive or negative.

We have been saying that we actually don't mind that raw material costs starts to climb. Typically, that foresees the others to start increasing prices and we can then follow.

Regarding this new areas, no we don't see any. We have been now, I think we have been able to demonstrate; for example, these margins behind these margins we have the highest ever Central Europe share, highest ever summer tire share and still we make 36% EBIT margin.

Very good. Thank you so much.

I have a question about the quarterly sales in Finland. According to my calculations, the sales have dropped heavily.

Is this a right estimation and can you elaborate on the reasons behind that? Thank you.

Yes, in Finland, we also believe that the market is changing more towards the fourth quarter. We have not been losing market share in the car dealer business according to our own estimations.

We believe that we have been slightly losing the market share in the consumer side, but very slightly. Some heavy tire impact there as well, some seasonality impacts, nothing drastic.

Okay. And on the one follow up, can you comment on the sales drop, the North America drop?

Like I said, that we've been increasing our market share in all of the segments we are, but the fact is that the tire deliveries this year were clearly lower than last year for the whole industry.

I have two questions if I may; firstly, about tire prices in Europe. If I remember, back in your Capital Markets Day you mentioned that the Nokian Tire prices are much lower than your premium competitors and given you've been taking quite a bit of share in Europe, I was just wondering what has been the price development on top of that.

Yes, it has been, as we have said at that time. So our price position, you can't change overnight if you don't want to have drastic changes in your volumes.

So we have been increasing our price position. So during all these times when we have been able to capture the market share, we have been increasing our price position, but slightly.

Typically, you can do it. If your price position is, for example, €85 against the €100, which is the price leader, you can make, in a year you can go to €86 or €87.

So this is the kind of speed that you make these changes. But naturally, or every single one point change naturally goes directly to the bottom line.

Absolutely. Thank you very much.

And the second question just very briefly on the third factory. Is this something that you're going to announce this year or which is going to be announced during the 4Q results in the beginning of the next year?

Yes, like I said, that we are, the only thing about the timing I can be sure about is that we are going to present our proposal, so operative management's proposal to Board at the early part of December. And then depending of the decision, we can either announce it immediately or then take some time.

And maybe the Board wants to, for example, have my successor to also review the plans or something like this. So about the announcement, I cannot say when that will happen.

And of course it's the Board's decision. So even about the decision, I cannot say what the decision will be.

I have two quick questions, the first one concerning the raw materials. We have seen that natural rubber and [thick] rubber price have gone up recently.

What type of increase do you expect for next year regarding raw materials? I mean this year it's a positive €17 million.

Can you give us an order of magnitude if the raw material prices stay where they are now, what could it be for next year? That's my first question.

Okay, if I answer that one first. So we are not going to give an outlook yet in this call regarding the raw materials.

Naturally, if we now look at that, what is the trend between these two quarters, so that's what we can say and whether that then continues. So the growth was only zero point something, so almost flat.

And we don't expect huge changes. So this trend we believe will be such that there will be growth, but we don't expect huge growth.

So with this kind of a trend next year would be some percentage points, maybe three, maybe five. But like I said, we will give that guidance in our fourth quarter full year result goal.

Okay, that's useful indication. Thank you.

My second question is, when I look at the winter tire business, or at least in Europe, it looks like that the bulk of the business now is done in the fourth quarter. Can you give us an order of magnitude of the percentage of winter tires which are sold between the different quarters or how big the fourth quarter represents in this overall volume?

My interpretation is that the bulk of it now is in the fourth quarter. Do you confirm that?

I confirm that. Of course we've been delivering already winter tires from second quarter onwards, even in Central Europe.

But year after year those shares both for second quarter and third quarter have gone down and the fourth quarter has increased. Naturally, smaller in average our customers are.

So if less and less of your sales go to the big wholesalers who make inventories on your behalf, this is the trend that you will see. And it's a good question about those percentages.

I actually don't have them in my mind, but the trend has been clear and it is a very significant part of the sales that takes place in the fourth quarter.

Is it possible that the fourth quarter could represent up to 50%?

I'm not going to start guessing because I can't just now simply remember. I'll make sure that in the next call we have that answer in place.

Okay, super. Thank you very much.

I have a couple of questions; first one on Russia. I think you did not take a very big credit loss provision this quarter.

You commented already a couple of times on it. Can you remind us if for the full year we can expect a similar headwind as last year because I think you said that in the past?

And also I remember there was a lawsuit also pending. Can you update us on those as well?

Thank you.

Okay. So if I start from the latter part of the questions.

So regarding the lawsuits and then possible returns of any of the existing bad debt provisions, there is no real progress. Some of the positive decisions from the courts, but still in the early phase.

Regarding the full year, we have been saying that we, last year we were at the level of EUR70 million. This year we have now booked EUR11 or so.

And we will be somewhere between this already booked. I'm expecting still some, maybe even closer to the last year's level would be the forecast.

So at least then we are prepared for all the kind of remaining tails of the already existing cases.

Okay. Thank you very much.

I have a second question please on the mix, if I can ask on Europe and North America? Some bigger competition, the bigger competitors highlight how important it is as a driver.

I don't if you can give us an indication in terms of local revenue, maybe, is mix a positive for you? Is it quantifiable 1% or 2% growth?

Can you give us any idea? Is it SUVs or some, any details will be appreciated?

Thank you.

Mix, of course this mix is always a very complicated issue. I remind you that there are at least four or five elements in mix that you can, you need to analyze and therefore the whole mix becomes very difficult to analyze.

You have the geographical mix, you have the customer mix inside the country, you have the winter tire, summer tier mix, you have the premium, medium segment mix and you have even the size mix that surprisingly changes between the quarters between the different years. And this is of course incidental or accidental and there are some trends; for example, the constant growth in SUV and bigger cars will boast bigger sizes.

We are not focusing so much on the size kind of discussion. Size is one a simple part of this equation.

We are talking about the premium and there we have been doing very well. In our third quarter figures this mix impact was about 2% positive.

Okay. For the, for those division, 2%?

Yes, for the passenger car tire price analysis.

Thank you very much.

Just a quick question. Your [Indiscernible] capital build so far that your build has been somewhat less than in previous years.

Or what is here the main impact and will we still see a strong Q4 [Indiscernible] in terms of free cash flow generation or could that be somewhat lower [Indiscernible].

Your line was now cutting and it was impossible for me to get your question. There were some problems with your line and at least everybody else is saying so.

Okay. Let me try again.

I'm adjusting my headset. Just on your working capital build so far this year, as we have seen, it has been less this year in terms of a relation on the full year basis versus the previous year's.

Would you still see a strong Q4 quarter where you have most of this working capital then being released again or is the weighting slightly different this year given you've had these different seasonality what you talked about, North American winter tire market, etcetera?

Behind our good cash flow is nothing that is taken away from the fourth quarter. So I'm expecting cash flow wise I'm expecting a very good quarter, fourth quarter.

Thank you very much.

Sorry, just one last follow up question on the dividend. I mean historically you've been just gradually boosting up your dividend year by year.

Is that going to change or what is your, what are your sort of early thoughts on dividend at this stage?

Well, it's not going to change in my time for sure and I leave it for my successor and the Board. I see it very unlikely that there would be any change on the dividend policy as such, which is to keep or slightly increase the absolute dividend per share despite the investment years.

We have a very good situation. We have good cash situation at the moment.

Cash flow situation is good. Profitability is good.

I'm predicting growth. So even and when you look at our balance sheet, it cannot be too much better going forward, so we even afford a little bit of leverage in terms of debt especially knowing the interest rates levels for a company like us with the balance sheet that we have.

Okay. Thank you very much.

Okay, it seems that we don't have any more questions. So I thank the audience behind the lines and then I thank the audience here in Helsinki meeting room.

Have a good rest of the day and rest of the year.